Italy's leftist Letta has new government in his sights

Italian leftist Enrico Letta was expected to reveal Saturday whether he has succeeded in uniting the eurozone heavyweight's feuding parties or needs more time to end a two-month political stalemate.

The moderate Letta, who has led two days of consultations with the parties in a bid to form a coalition government, was said by sources close to his staff to be on the point of persuading the bickering left and right to work together.

Once differences between Italy's centre-left Democratic Party and Silvio Berlusconi's People of Freedom party have been ironed out, Letta will formally accept the nomination of prime minister from President Giorgio Napolitano.

He will then be sworn in along with his new cabinet, before a handover ceremony with the departing Mario Monti, whose government has limped on in a caretaker capacity since the former EU commissioner resigned in December.

If he is sworn in on Saturday, Letta is likely to take Sunday to draft up his inaugural speech to parliament, which he will give on Monday, according to Italian media reports.

The government will then be put to confidence votes in the two houses of parliament.

The prime minister-designate said after talks with the main parties on Thursday that his attempt to put together a grand coalition had encountered "difficulties", and there were signs Friday that negotiations were dragging on.

The 46-year-old has said he wants to move quickly to tackle the social fallout of a painful recession and ease the austerity measures implemented by Monti, but cross-party unity has come with demands attached.

Negotiations have been trickiest with the scandal-tainted billionaire tycoon Berlusconi, whose votes his government will depend on, and who has insisted on the abolition and repayment of a controversial housing tax introduced in 2012.

Such a move would set the budget back some eight billion euros ($10.4 billion) in a country suffering from its longest recession in 20 years.

Furthermore, Letta's own Democratic Party (PD), which narrowly won inconclusive general elections in February, is deeply divided over going into government with former premier Berlusconi's People of Freedom party (PDL).

The PD said on Friday it would unanimously support Letta, but there were rumblings from disgruntled rebels.

Most analysts say that the parties will eventually find a way to work together under Letta because the alternative would likely be fresh elections -- which neither side would necessarily win with the majority needed to govern.

The question is whether they can be persuaded to compromise on key aspects of government programme and ministerial appointments before the markets open on Monday, after which they risk international investors voicing concerns over Italy's political stability.

Moody's affirmed Italy's Baa2 rating and negative outlook Friday, warning the country's medium-term prospects for economic growth remained "weak".

The ratings agency said "strong fundamentals" and the government's primary surplus were encouraging signs, but that there was an "elevated risk that the Italian sovereign might lose investor confidence and, ultimately, access to private debt markets as a result of the political stalemate."

Many observers were up-beat about Letta's chances despite the challenges following Berlusconi's indication on Friday that his party would not hold up the formation of a government and his praise for Letta's approach to the talks.

The scandal-tainted tycoon has ruled out his own inclusion in the cabinet, but his critics said the media magnate is the real victor of the institutional crisis which has gripped the eurozone's third largest economy.

In two trials due to resume next month, Berlusconi is appealing a tax fraud conviction and defending himself on charges of having sex with a 17-year-old prostitute -- but his popularity levels have recently been on the up again.

Observers say that means he can push for Letta to choose ministers likely to favour him and the right, and offer him some longed-for protection in his legal battles.